Economics – Microeconomic decision-makers - Firms and production | e-Consult
Microeconomic decision-makers - Firms and production (1 questions)
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The demand for a factor of production is determined by how much firms want to employ of that factor. This desire is influenced by several factors.
- Demand for the Product: A higher demand for the final product will generally lead to a higher demand for the factors of production required to produce it. For example, if demand for smartphones increases, the demand for components like semiconductors, screens, and assembly labor will also increase.
- Prices of Other Factors of Production: The price of alternative factors of production can impact demand. If the price of capital (machinery) increases significantly, firms might switch to using more labor, increasing the demand for labor. Conversely, if labor becomes very expensive, firms might invest in more capital.
- Availability of the Factor: Limited availability of a factor will restrict its use, reducing demand. For instance, a shortage of skilled construction workers will limit the construction output, and therefore the demand for those workers. Conversely, increased availability (e.g., through improved training programs) can boost demand.
- Productivity of the Factor: Improvements in the productivity of a factor can also affect demand. If a new technology increases the productivity of labor, firms will need fewer workers to produce the same output, potentially reducing the demand for labor. Alternatively, if a factor becomes more productive, its cost per unit of output falls, making it more attractive to firms and increasing demand.
Example: Consider the demand for steel. If demand for cars (which require steel) increases, the demand for steel will increase. If the price of iron ore (used to make steel) rises, the cost of producing steel increases, potentially reducing the demand for steel. If there's a shortage of skilled steelworkers, it will limit steel production and reduce the demand for steel. Finally, if a new, more efficient steelmaking process is developed, the productivity of steel production will increase, potentially reducing the demand for labor in steel mills.